Princeton Review (REVU) 10-Q 2007 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

þ	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended June 30, 2007
OR
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from          to

Commission file number000-32469

THE PRINCETON REVIEW, INC.

(Exact name of registrant as specified in its charter)

Delaware	22-3727603
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2315 Broadway New York, New York	10024
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:

(212) 874-8282

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).  Yes o     No þ

The Company had 28,105,005 shares of $0.01 par value common stock outstanding at August 8, 2007.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements	1
Condensed Consolidated Balance Sheets	1
Condensed Consolidated Statements of Operations	2
Condensed Consolidated Statements of Cash Flows	3
Notes to Condensed Consolidated Financial Statements	4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures about Market Risk	21
Item 4. Controls and Procedures	22
PART II. OTHER INFORMATION	23
Item 1. Legal Proceedings	23
Item 1A. Risk Factors	24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3. Defaults Upon Senior Securities	24
Item 4. Submission of Matters to a Vote of Security Holders	24
Item 5. Other Information	24
Item 6. Exhibits	24
SIGNATURES	25
EX-10.1: MICHAEL PERIK EMPLOYMENT AGREEMENT
EX-10.2: MARK CHERNIS EMPLOYMENT AGREEMENT AMENDMENT
EX-10-3: MICHAEL PERIK OPTION AGREEMENT
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION

i

PART I. FINANCIAL INFORMATION

Item 1.   Condensed Consolidated Financial Statements

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
(in thousands, except share data)

	June 30,			December 31,
	2007			2006
	(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents	$	11,179		$	10,822
Accounts receivable, net of allowance of $4,331 in 2007 and $2,848 in 2006		25,040			31,531
Accounts receivable-related parties		104			124
Other receivables, related parties		2,425			1,999
Inventory		2,409			2,950
Prepaid expenses		1,068			1,653
Other current assets		1,200			2,612
Other current assets related to discontinued operations		—			181
Total current assets		43,425			51,872
Furniture, fixtures, equipment and software development, net		14,204			16,071
Goodwill		31,006			31,006
Investment in affiliates		1,639			1,639
Other intangibles, net		10,217			11,527
Other assets		7,661			4,013
Other assets related to discontinued operations		—			1,980
Total assets	$	108,152		$	118,108
LIABILITIES & STOCKHOLDERS’ EQUITY:
Current liabilities:
Line of credit	$	15,000		$	3,000
Accounts payable		4,457			15,220
Accrued expenses		10,381			11,277
Current maturities of long-term debt		1,127			1,369
Deferred income		19,328			20,672
Liabilities related to discontinued operations		—			2,541
Total current liabilities		50,293			54,079
Deferred rent		2,520			2,558
Long-term debt		1,665			14,127
Fair value of derivatives and warrant		4,007			181
Series B-1 Preferred Stock, $0.01 par value; 10,000 shares authorized; 6,000 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively		6,000			6,000
Stockholders’ equity
Preferred stock, $0.01 par value; 4,990,000 shares authorized, none issued and outstanding		—			—
Common stock, $0.01 par value; 100,000,000 shares authorized; 28,105,005 and 27,601,268 issued and outstanding at June 30, 2007 and December 31, 2006, respectively		281			276
Additional paid-in capital		119,361			117,082
Accumulated deficit		(75,666	)		(75,871	)
Accumulated other comprehensive loss		(309	)		(324	)
Total stockholders’ equity		43,667			41,163
Total liabilities and stockholders’ equity	$	108,152		$	118,108

See accompanying notes to the condensed consolidated financial statements.

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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
	(Unaudited)
Revenue
Test Preparation Services	$	27,531		$	22,540		$	54,621		$	48,433
K-12 Services		8,854			10,695			21,935			18,413
Total revenue		36,385			33,235			76,556			66,846
Cost of revenue
Test Preparation Services		8,920			8,013			20,132			16,196
K-12 Services		5,514			5,369			12,443			10,564
Total cost of revenue		14,434			13,382			32,575			26,760
Gross Profit		21,951			19,853			43,981			40,086
Operating expenses		21,713			20,191			44,364			42,418
Income (loss) from operations		238			(338	)		(383	)		(2,332	)
Interest income (expense)		(497	)		(192	)		(841	)		(220	)
Other income (expense)		(3,687	)		(156	)		(3,763	)		(96	)
Equity in the income (loss) of affiliates		—			17			—			(50	)
Income (loss) before income taxes		(3,946	)		(669	)		(4,987	)		(2,698	)
(Provision) benefit for income taxes		300			—			478			—
Net income (loss) from continuing operations		(3,646	)		(669	)		(4,509	)		(2,698	)
Discontinued operations
Net income (loss) from discontinued operations		(246	)		(428	)		952			(306	)
Gain from disposal of discontinued operations		—			—			4,539			—
(Provision) benefit for income taxes		(394	)		—			(572	)		—
Net income (loss) from discontinued operations		(640	)		(428	)		4,919			(306	)
Net income (loss)		(4,286	)		(1,097	)		410			(3,004	)
Dividends and accretion onSeries B-1 Preferred Stock		(104	)		(147	)		(207	)		(305	)
Income (loss) attributed to common stockholders	$	(4,390	)	$	(1,244	)	$	203		$	(3,309	)
Earnings (loss) per share
Basic and diluted
Income (loss) from continuing operations	$	(0.13	)	$	(0.03	)	$	(0.17	)	$	(0.11	)
Income (loss) from discontinued operations		(0.02	)		(0.02	)		0.18			(0.01	)
Net income (loss)	$	(0.15	)	$	(0.05	)	$	0.01		$	(0.12	)
Weighted average shares used in computing income (loss) per share		27,890			27,574			27,837			27,574

See accompanying notes to the condensed consolidated financial statements.

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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

	For the Six Months
	Ended June 30,
	2007			2006
	(Unaudited)
Cash flows provided by (used for) operating activities:
Net income (loss) from continuing operations	$	(4,509	)	$	(2,698	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		1,464			1,116
Amortization		2,766			3,041
Bad debt expense		1,151			484
Write-off of deferred financing costs		33			—
Write-off of inventory		—			265
Change in fair value of derivatives		3,826			(281	)
Deferred rent		(38	)		146
Stock based compensation		2,005			300
Other, net		(28	)		(89	)
Net change in operating assets and liabilities:
Accounts receivable		4,934			(2,918	)
Inventory		541			(561	)
Prepaid expenses		585			333
Other assets		(2,421	)		(2,138	)
Accounts payable and accrued expenses		(11,656	)		(5,147	)
Deferred income		(1,344	)		5,280
Net cash provided by (used for) operating activities		(2,691	)		(2,867	)
Cash provided by (used for) investing activities:
Purchases of furniture, fixtures, equipment and software development		(1,074	)		(2,022	)
Additions to capitalized K-12 content, capitalized course costs		(42	)		(1,010	)
Payment of related party loan		120			345
Payment of note receivable		86			266
Payment of loan receivable		—			250
Net cash provided by (used for) investing activities		(910	)		(2,171	)
Cash flows provided by (used for) financing activities:
Redemption ofSeries B-1 Preferred Stock		—			(4,377	)
Proceeds from revolving credit facility		—			10,000
Payment of credit facility deferred financing costs		—			(168	)
Capital lease payments		(392	)		(403	)
Dividends onSeries B-1 P referred Stock		(207	)		(305	)
Notes payable related to acquisitions		(313	)		(318	)
Proceeds from exercise of options		279			11
Net cash provided by (used for) financing activities		(633	)		4,440
Total cash flows used in continuing operations		(4,234	)		(598	)
Cash Flows from Discontinued Operations
Income from discontinued operations		953			(305	)
Gain on disposal of discontinued operations		(4,538	)		—
Other adjustments to reconcile net income to net cash provided by operating activities		1,176			(2,182	)
Net cash provided by (used for) operating activities		(2,409	)		(2,487	)
Cash received from disposal of discontinued operations		7,000			—
Other cash provided by investing activities		—			2,410
Net cash provided by (used for) investing activities		7,000			2,410
Net cash provided by (used for) discontinued operations		4,591			(77	)
Increase (decrease) in cash and cash equivalents		357			(675	)
Cash and cash equivalents, beginning of period		10,822			8,002
Cash and cash equivalents, end of period	$	11,179		$	7,327

See accompanying notes to the condensed consolidated financial statements.

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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

1.   Basis of Presentation

The accompanying unaudited interim consolidated financial statements include the accounts of The Princeton Review, Inc. and its wholly-owned subsidiaries, The Princeton Review Canada Inc. and Princeton Review Operations L.L.C., as well as the Company’s national advertising fund (together, the “Company”).

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures reflect all adjustments, consisting only of normal recurring accruals, that are, in the opinion of management, necessary for a fair presentation of the interim financial statements and are adequate to make the information not misleading. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2006 included in the Company’s Annual Report onForm 10-K, as filed with the Securities and Exchange Commission. The results of operations for the three-month and six-month periods ended June 30, 2007 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.

Prior periods were recast to reflect the operations of certain of the Company’s Admissions Services Division. The Company sold the assets related to providing electronic application and prospect management tools to schools and higher education institution customers (the “Admissions Tech Business”) which have been classified as discontinued operations. See Note 12 — Disposal of Assets.

Products and Services

The following table summarizes the Company’s revenue and cost of revenue for the three and six month periods ended June 30, 2007 and 2006:

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
			(In thousands)
Revenue
Services	$	31,182	$	25,625	$	68,078	$	55,558
Products		1,989		5,563		3,582		7,089
Other		3,214		2,047		4,896		4,199
Total revenue	$	36,385	$	33,235	$	76,556	$	66,846
Cost of Revenue
Services	$	13,647	$	11,064	$	31,204	$	23,442
Products		487		2,131		1,035		2,997
Other		300		187		336		321
Total cost of revenue	$	14,434	$	13,382	$	32,575	$	26,760

Services revenue includes course fees, professional development, subscription fees and marketing services fees. Products revenue includes sales of workbooks, test booklets and printed tests, sales of course material to independently owned franchises and fees from a publisher for manuscripts delivered. Other revenue includes royalties from independently owned franchises and royalties and marketing fees received from publishers.

New Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115,” (“SFAS No. 159”). This standard permits entities to measure many financial instruments and certain other items at fair value. The objective is to improve

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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.

The provisions of SFAS No. 159 are effective beginning in our fiscal year 2009 and are currently not expected to have a material effect on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), to establish a consistent framework for measuring fair value and expand disclosures on fair value measurements. The provisions of SFAS No. 157 are effective beginning in our fiscal year 2009 and are currently not expected to have a material effect on our consolidated financial statements.

In July 2006, the Financial Accounting Standards Board (“FASB”) released FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”(“FIN 48”). FIN 48 clarifies the accounting and reporting for uncertainties in income taxes and prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 prescribes a two-step evaluation process for tax positions. The first step is recognition based on a determination of whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is to measure a tax position that meets the more-likely-than-not threshold. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. FIN 48 is effective beginning in the first quarter of fiscal 2007 and the adoption of this pronouncement did not have a significant impact on the Company’s consolidated financial statements.

In February 2006, FASB issued SFAS No. 155,Accounting for Certain Hybrid Financial Instruments — an Amendment of FASB Statements No. 133 and 140(“SFAS No. 155”). SFAS No. 155 allows financial instruments that contain an embedded derivative and that otherwise would require bifurcation to be accounted for as a whole on a fair value basis, at the holders’ election. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. SFAS No. 155 is effective for fiscal years ending after September 15, 2006. The adoption of this pronouncement did not have a significant impact on the Company’s consolidated financial statements.

Use of Estimates

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant accounting estimates used include estimates for uncollectible accounts receivable, deferred tax valuation allowances, impairment write-downs, amortization lives assigned to intangible assets, and fair value of assets and liabilities. Actual results could differ from those estimated.

Reclassifications

Certain balances have been reclassified to conform to the current quarter’s presentation.

2.   Stock-Based Compensation

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS No. 123”), using the modified prospective transition application method. Under this method, compensation expense is recognized for employee awards granted, modified, or settled subsequent to December 31, 2005, and the unvested portion of awards granted to employees in prior years. Compensation expense is recognized on a straight-line method over the requisite service period.

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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

During 2007, the Board of Directors approved the granting of 155,454 shares of Restricted Stock under the Stock Incentive Plan to the senior management of the Company (on May 25, 2007) and the outside members of the Board of Directors (on June 30, 2007), having a grant-date value of $865,000. These Restricted Stock awards generally vest quarterly over a two year period. As of June 30, 2007, 207,400 shares of Restricted Stock were outstanding with unrecognized compensation cost of $801,000 to be recognized over a period of 1.25 years.

The Board of Directors also approved the granting of 257,519 shares of Restricted Stock, which vested immediately, as payment of bonuses to employees, in lieu of payment in cash having a compensation cost of $1.6 million.

There were no stock options or restricted stock awards in the first quarter of 2007.

Total stock-based compensation expense recorded for the three and six months ended June 30, 2007 and 2006 was $1.9 million and $130,000 and $2.0 million and $300,000, respectively.

3.   Line of Credit

Credit Agreement

On April 10, 2006, the Company entered into a Credit Agreement (the “Credit Agreement”), among the Company, Princeton Review Operations, L.L.C., a wholly owned subsidiary of the Company (“Operations”), Golub Capital CP Funding, LLC and such other lenders who become signatory from time to time, and Golub Capital Incorporated (“Golub”), as Administrative Agent.

The Credit Agreement, as amended, provides for a revolving credit facility with a term of five years and a maximum aggregate principal amount of $15.0 million (the “Credit Facility”). Operations is a guarantor of the Company’s obligations under the Credit Agreement.

The Company’s borrowings under the Credit Facility are secured by a first priority lien on all of the Company’s and Operations’ assets. In addition, the Company pledged all of its equity interests in its subsidiaries, and all other equity investments held by the Company to Golub as security for the Credit Facility.

The Credit Agreement contains affirmative, negative and financial covenants customary for financings of this type, including, among other things, limits on the Company’s ability to make investments and incur indebtedness and liens, maintenance of a minimum level of EBITDA of the Company’s Test Preparation Services Division, and maintenance of a minimum net worth. The Credit Agreement contains customary events of default for facilities of this type (with customary grace periods and materiality thresholds, as applicable) and provides that, upon the occurrence and continuation of an event of default, the interest rate on all outstanding obligations will be increased and payment of all outstanding loans may be acceleratedand/or the lenders’ commitments may be terminated.

At December 31, 2006, the Company failed the minimum net worth covenant and obtained a waiver of that covenant through January 1, 2008. On February 16, 2007, the Company entered into a third amendment of the Credit Agreement (the “Third Amendment”). The Third Amendment required the Company to (i) repay to Golub $3.0 million from the proceeds of the sale of the Company’s Admissions Services technology business and (ii) set the amount of the Credit Facility at $12.0 million. This $3.0 million payment was made by the Company on February 19, 2007.

Pursuant to the Third Amendment which increased the annual interest rate of the Credit Facility, outstanding amounts under the Credit Facility up to $10.0 million bear interest at rates based on either (A) 300 basis points over the greater of (x) the prime rate and (y) the Federal Funds Rate plus 50 basis points or (B) 400 basis points over the London Interbank Offered Rate (“LIBOR”), at the Company’s election and in accordance with the terms of the Credit Agreement. Outstanding amounts under the Credit Facility in excess of $10.0 million (or the borrowing base amount, if lower) bear the following annual interest rates: either (A) 400 basis points over the greater of (x) the prime rate and (y) the Federal Funds Rate plus 50 basis points or (B) 500 basis points over the LIBOR rate, at the Company’s election and in accordance with the terms of the Credit Agreement.

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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

On March 29, 2007, the Company entered into a further amendment of the Credit Agreement (the “Fourth Amendment”). Under the Fourth Amendment, the maximum borrowing amount was increased to $15.0 million, and the Company drew down the full available amount on March 30, 2007. The term of the Credit Facility remains unchanged at five years from the date of the original Credit Agreement. The terms for the annual interest rate for the facility are the same as those under the Third Amendment. On July 24, 2007 the Company paid down the $15 million of debt outstanding and any accumulated interest with Golub Capital and terminated the credit facility. (See Note 12 — Subsequent Events).

4.   Series B-1 Preferred Stock

On June 4, 2004, the Company sold 10,000 shares of itsSeries B-1 Preferred Stock to Fletcher International, Ltd. (“Fletcher”) for proceeds of $10,000,000. In May 2006, 4,000 shares ofSeries B-1 Preferred Stock were redeemed in cash, leaving 6,000 shares outstanding. These shares are convertible into common stock at any time (the “Holder Conversion Option”). Prior to conversion, each share accrues dividends at an annual rate of the greater of 5% and the90-day LIBOR plus 1.5% (6.93% at June 30, 2007), subject to adjustment. Dividends are payable, whether or not declared by the Board of Directors out of funds legally available therefor, in cash or registered shares of common stock, at the Company’s option. At the time of issuance of theSeries B-1 Preferred Stock, each share ofSeries B-1 Preferred Stock was convertible into a number of shares of common stock equal to: (1) the stated value of one share ofSeries B-1 Preferred Stock plus accrued and unpaid dividends, divided by (2) the conversion price of $11.00, subject to adjustment. In accordance with the terms of the agreement with the holder, the conversion price was decreased to $6.9327 per share (as of June 30, 2007), because effectiveness of the registration statement relating to theSeries B-1 Preferred Stock shares was delayed and, once it was declared effective, the Company thereafter failed to maintain its effectiveness. The conversion price was subject to further reduction upon certain events such as the issuance of common stock at a price below the conversion price or if the Company fails to keep the registration statement current.

The holder may redeem its shares of theSeries B-1 Preferred Stock, in lieu of converting such shares at any time for shares of common stock unless the Company satisfies the conditions for cash redemption. If the holder elects to redeem its shares and the Company does not elect to make such redemption in cash, then each share ofSeries B-1 Preferred Stock will be redeemed for a number of shares of common stock equal to: (1) the stated value of $1,000 per share ofSeries B-1 Preferred Stock plus accrued and unpaid dividends, divided by (2) 102.5% of the prevailing price of common stock at the time of delivery of a redemption notice (based on an average daily trading price formula). If the holder elects to redeem its shares and the Company elects to make such redemption in cash, then the holder will receive funds equal to the product of: (1) the number of shares of common stock that would have been issuable if the holder redeemed its shares ofSeries B-1 Preferred Stock for shares of common stock; and (2) the closing price of the common stock on the NASDAQ Global Market on the date notice of redemption was delivered. As of June 4, 2014 the Company may redeem any shares ofSeries B-1 Preferred Stock then outstanding. If the Company elects to redeem such outstanding shares, the holder will receive funds equal to the product of: (1) the number of shares ofSeries B-1 Preferred Stock so redeemed, and (2) the stated value of $1,000 per share ofSeries B-1 Preferred Stock, plus accrued and unpaid dividends.

In addition, the Company granted the holder certain rights entitling the holder to purchase up to 20,000 shares of additional preferred stock, at a price of $1,000 per share, for an aggregate additional consideration of $20,000,000 (the “Warrant”). These rights to purchase additional shares are legally detachable from theSeries B-1 Preferred Stock and may be exercised by the holder separately from actions taken with regard to the originally issuedSeries B-1 Preferred Stock. The agreement with the holder provides that any shares of additional preferred stock will have the same conversion ratio as theSeries B-1 Preferred Stock, except that the conversion price will be the greater of (1) $11.00, or (2) 120% of the prevailing price of common stock at the time of exercise of the rights (based on an average daily trading price formula), subject to adjustment upon the occurrence of certain events. Due to the delay in the effectiveness of the registration statement relating to theSeries B-1 Preferred Stock, and the Company’s failure to maintain its effectiveness as required by the agreement with the holder, the conversion price

7

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

for any such additional series of preferred stock was reduced, and, as of June 30, 2007, the greater of (1) $6.9327 or (2) 75.63% of the prevailing price of common stock at the time of exercise of the rights. These rights may be exercised by the holder on one or more occasions commencing July 1, 2005, and for the24-month period thereafter, which period may be extended under certain circumstances, including extension by one day for each day the registration requirements are not met. The Agreement with the holder also provides that shares of additional preferred stock will be redeemable upon terms substantially similar to those of theSeries B-1 Preferred Stock.

TheSeries B-1 Preferred Stock also contains a provision (the “Make-whole Provision”) that indicates that if the Company is party to a certain acquisition, asset sale, capital reorganization or other transaction in which the power to cast the majority of the eligible votes at a meeting of the Company’s shareholders is transferred to a single entity or group, upon consummation of the transaction, the holder is entitled to receive (at the holder’s election)

a) the consideration to which the holder would have been entitled had it converted theSeries B-1 Preferred Stock into common stock immediately prior to consummation,

b) the consideration to which the holder would have been entitled had it redeemed theSeries B-1 Preferred Stock for common stock immediately prior to consummation, or

c) cash, initially equal to 160% of the aggregate redemption amount of theSeries B-1 Preferred Stock less 5% of the redemption amount for each full year theSeries B-1 Preferred Stock was outstanding.

On July 24, 2007, the Company terminated the Series B-1 Preferred Stock, together with the embedded derivatives and warrant. (See Note 12 — Subsequent Events).

Embedded derivatives and warrant

Under Statement of Financial Accounting Standards No. 133,“Accounting for Derivatives and Hedging Activities”(SFAS 133), certain contractual terms that meet the accounting definition of a derivative must be accounted for separately from the financial instrument in which they are embedded. The Company has concluded that the Holder Conversion Option and the Make-whole Provision constitute embedded derivatives.

The Holder Conversion Option meets SFAS 133’s definition of an embedded derivative. In addition, the Holder Conversion Option is not considered “conventional” because the number of shares received by the holder upon exercise of the option could change under certain conditions. The Holder Conversion Option is considered an equity derivative and its economic characteristics are not considered to be clearly and closely related to the economic characteristics of theSeries B-1 Preferred Stock, which is a considered more akin to a debt instrument than equity.

Similarly, the embedded Make-whole Provision also must be accounted for separately from theSeries B-1 Preferred Stock. The Make-whole Provision specifies if certain events (such as a business combination) that constitute a change of control occur, the Company may be required to settle theSeries B-1 Preferred Stock at 160% of its face amount. Accordingly, the Make-whole Provision meets SFAS 133’s definition of a derivative, and its economic characteristics are not considered clearly and closely related to the economic characteristics of theSeries B-1 Preferred Stock.

Accordingly, under SFAS 133, these two embedded derivatives are required to be bundled into a single derivative instrument and accounted for separately from theSeries B-1 Preferred Stock at fair value.

In addition, as described above, when the Company issued theSeries B-1 Preferred Stock, it granted the holder the Warrant to purchase up to 20,000 shares of additional preferred stock at a price of $1,000 per share.

The preferred shares that the holder is entitled to receive, upon exercise of the Warrant, may be redeemed at a future date. Statement of Accounting Standards No. 150,“Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”(SFAS 150), requires that a warrant which contains an obligation that may require the issuer to redeem the shares in cash, be classified as a liability and accounted for at fair value.

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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

The Company determined that the fair value of the combined embedded derivatives and Warrant at inception was $2.6 million and increased long-term liabilities by $1.7 million for the embedded derivatives and $854,000 for the fair value of the Warrant. In subsequent periods, these liabilities are accounted for at fair value, with changes in fair value recognized in earnings. In addition, the Company recognized a discount to the recorded value of theSeries B-1 Preferred Stock resulting from the allocation of proceeds to the embedded derivatives and Warrant. This discount was accreted as a preferred stock dividend to increase the recorded balance of theSeries B-1 Preferred Stock to it redemption value at its earliest possible redemption date (November 28, 2005).

The embedded derivatives and Warrant were valued at each fiscal quarter-end using a valuation model that combines the Black-Scholes option pricing approach with other analytics. Key assumptions used in the pricing model were based on the terms and conditions of the embedded derivatives and Warrant and the actual stock price of the Company’s common stock at each fiscal quarter-end. Adjustments were made to the conversion option value to reflect the impact of potential registration rights violations and the attendant reductions in the conversion price of the underlying shares. Other assumptions included a volatility rate ranging from 25% — 40%, and a risk-free rate corresponding to the estimated life of the security, based on its likelihood of conversion or redemption. The estimated life ranged from a high of four years at the inception of theSeries B-1 Preferred Stock in June 2004, to just under two years at June 30, 2006.

The value of the Make-whole Provision explicitly considered the present value of the potential premium that would be paid related to, and the probability of, an event that would trigger its payment. The probability of a triggering event was assumed to be very low at issuance, escalating to a 2% probability in year three and beyond. These assumptions were based on management’s estimates of the probability of a change of control event occurring.

Since the dividend rate on theSeries B-1 Preferred Stock adjusts with changes in market rates due to the LIBOR-Index provision, the key component in the valuation of the Warrant is the estimated value of the underlying embedded conversion option. Accordingly, similar assumptions to those used to value the compound derivative were used to value the Warrant, including, the fiscal quarter-end stock price, the exercise price of the conversion option adjusted for changes based on the registration rights agreement, an assumed volatility rate ranging from 25% — 40% and risk-free rate based on the estimated life of the Warrant.

Dividends

For the three and six months ended June 30, 2007, cash dividends in the amount of $104,000 and $207,000, respectively, were paid to theSeries B-1 Preferred stockholder. For the three and six months ended June 30, 2006, cash dividends in the amount of $147,000 and $304,000, respectively, were paid to theSeries B-1 Preferred stockholder.

5.   Income Taxes

During the current quarter, pursuant to FAS 109, the Company has recorded an income tax benefit related to continuing operations for the three and six months ended June 30, 2007 in the amount of $394,000 and $572,000, which is offset by a foreign tax provision of $94,000. For the three months ended March 31, 2007, the Company recorded an income tax benefit of $178,000 which was previously not recorded. Management considers the March 31, 2007 tax benefit of $178,000 immaterial to that quarter and the year ending December 31, 2007. A corresponding provision for income taxes for the three and six months ended June 30, 2007 of $394,000 and $572,000 has been recorded as part of the Company’s Income from Discontinued Operations.

6.   Segment Information

The Company’s operations are aggregated into three reportable segments, reduced from four as a result of the sale of substantially all of the former Admissions Services division. The operating segments reported below are the

9

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

segments of the Company for which separate financial information is available and for which operating income is evaluated regularly by executive management in deciding how to allocate resources and in assessing performance.

The following segment results include the allocation of certain information technology costs, accounting services, executive management costs, legal department costs, office facilities expenses, human resources expenses and other shared services. The allocations are made to the divisions on the basis of equivalent bought-in third party services.

The majority of the Company’s revenue is earned by the Test Preparation Services division, which sells a range of services including test preparation, tutoring and academic counseling. Test Preparation Services derives its revenue from Company operated locations and from royalties from, and product sales to, independently-owned franchises. The K-12 Services division earns fees from assessment, intervention materials sales and professional development services it renders to K-12 schools and from its content development work. Additionally, each division earns royalties and other fees from sales of its books published by Random House.

In connection with the transaction described in Note 10, financial results associated with the admissions publications and college counseling services previously reported in the Admissions Services division have been recasted for all periods presented into Test Preparation Services and K-12 Services, respectively.

The segment results include EBITDA for the periods indicated. As used in this report, EBITDA means earnings before interest, income taxes, depreciation and amortization. The Company believes that EBITDA, a non-GAAP financial measure, represents a useful measure for evaluating its financial performance because it reflects earnings trends without the impact of certain non-cash and non-operations-related charges or income. The Company’s management uses EBITDA to measure the operating profits or losses of the business. Analysts, investors and rating agencies frequently use EBITDA in the evaluation of companies, but the Company’s presentation of EBITDA is not necessarily comparable to other similarly titled measures of other companies because of potential inconsistencies in the method of calculation. EBITDA is not intended as an alternative to net income (loss) as an indicator of the Company’s operating performance, or as an alternative to any other measure of performance calculated in conformity with GAAP.

	Three Months Ended June 30, 2007
	Test
	Preparation		K-12
	Services		Services			Corporate			Total
	(In thousands)
Revenue	$	27,531	$	8,854		$	—		$	36,385
Operating expense (including depreciation and amortization)		13,223		3,817			4,673			21,713
Operating income (loss)		5,388		(477	)		(4,673	)		238
Depreciation and amortization		574		921			543			2,038
Other income (expense)		—		—			(3,688	)		(3,688	)
Segment EBITDA		5,962		444			(7,818	)		(1,412	)
Total segment assets	$	53,434	$	29,413		$	25,305		$	108,152
Segment goodwill	$	31,006	$	—		$	—		$	31,006
Expenditures for long lived assets	$	139	$	164		$	288		$	591

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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

	Three Months Ended June 30, 2006
	Test
	Preparation		K-12
	Services		Services		Corporate			Total
	(In thousands)
Revenue	$	22,540	$	10,695	$	—		$	33,235
Operating expense (including depreciation and amortization)		11,795		4,672		3,724			20,191
Operating income (loss)		2,731		655		(3,724	)		(338	)
Depreciation and amortization		850		927		529			2,306
Other income (expense)		—		—		(140	)		(140	)
Segment EBITDA		3,581		1,582		(3,335	)		1,828
Total segment assets	$	57,860	$	28,049	$	21,611		$	107,520
Segment goodwill	$	31,506	$	—	$	—		$	31,506
Expenditures for long lived assets	$	50	$	10	$	630		$	690

	Six Month Ended June 30, 2007
	Test
	Preparation		K-12
	Services		Services		Corporate			Total
	(In thousands)
Revenue	$	54,621	$	21,935	$	—		$	76,556
Operating expense (including depreciation and amortization)		25,600		8,188		10,576			44,364
Operating income (loss)		8,888		1,305		(10,576	)		(383	)
Depreciation and amortization		1,100		2,033		1,097			4,230
Other income (expense)		0		—		(3,763	)		(3,763	)
Segment EBITDA		9,988		3,338		(13,242	)		84
Total segment assets	$	53,434	$	29,413	$	25,305		$	108,152
Segment goodwill	$	31,006	$	—	$	—		$	31,006
Expenditures for long lived assets	$	314	$	227	$	575		$	1,116

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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

	Six Months Ended June 30, 2006
	Test
	Preparation		K-12
	Services		Services			Corporate			Total
	(In thousands)
Revenue	$	48,433	$	18,413		$	—		$	66,846
Operating expense (including depreciation and amortization)		25,635		8,795			7,988			42,418
Operating income (loss)		6,602		(946	)		(7,988	)		(2,332	)
Depreciation and amortization		1,576		1,742			839			4,157
Other income (expense)		—		—			(146	)		(146	)
Segment EBITDA		8,178		796			(7,295	)		1,679
Total segment assets	$	57,860	$	28,049		$	21,611		$	107,520
Segment goodwill	$	31,506	$	—		$	—		$	31,506
Expenditures for long lived assets	$	630	$	1,070		$	1,431		$	3,131

Reconciliation of operating income (loss) to net income (loss) (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Total income (loss) from reportable segments	$	238		$	(338	)	$	(383	)	$	(2,332	)
Unallocated amounts:
Interest income (expense)		(497	)		(192	)		(841	)		(220	)
Other income (expense)		(3,687	)		(156	)		(3,763	)		(96	)
Equity in loss of affiliate		—			17			—			(50	)
(Provision) benefit for income taxes		300			—			478			—
Income (loss) from continuing operations		(3,646	)		(669	)		(4,509	)		(2,698	)
Discontinued operations		(246	)		(428	)		5,491			(306	)
Provision for income taxes		(394	)		—			(572	)		—
Net income (loss) from discontinued operations		(640	)		(428	)		4,919			(306	)
Net income (loss)	$	(4,286	)	$	(1,097	)	$	410		$	(3,004	)

7.   Income (loss) Per Share

Basic and diluted net income (loss) per share information for all periods is presented under the requirements of SFAS No. 128,Earnings per Share.Basic net income (loss) per share is computed by dividing net income (loss) attributed to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is determined in the same manner as basic net income (loss) per share except that the number of shares is increased assuming exercise of dilutive stock options, warrants and convertible securities and dividends related to convertible securities are added back to net income (loss) attributed to common stockholders. The calculation of diluted net income (loss) per share excludes potential common shares if the effect is antidilutive.

A reconciliation of net income (loss) and the number of shares used in computing basic per share are as follows.

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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
	(In thousands)
Income (loss) from continuing operations	$	(3,646	)	$	(669	)	$	(4,509	)	$	(2,698	)
Income (loss) from discontinued operations		(640	)		(428	)		4,919			(306	)
Less preferred dividends		(104	)		(147	)		(207	)		(305	)
Net income (loss) attributed to common stockholders	$	(4,390	)	$	(1,244	)	$	203		$	(3,309	)
Weighted average common shares outstanding for the period		27,890			27,574			27,837			27,574
Basic earnings per share:
Income (loss) from continuing operations	$	(0.13	)	$	(0.03	)	$	(0.17	)	$	(0.11	)
Income (loss) from discontinued operations		(0.02	)		(0.02	)		0.18			(0.01	)
Net income (loss)	$	(0.15	)	$	(0.05	)	$	0.01		$	(0.12	)

The following shares were excluded from the computation of diluted earnings per common share because of their antidilutive effect.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Net effect of dilutive stock options-based on the treasury stock method		171		176		160		167
Effect of convertible preferred stock-based on the if-converted method		1,117		1,069		1,116		1,448
		1,288		1,245		1,276		1,615

8.   Comprehensive Income (Loss)

The components of comprehensive (loss) for the three and six months ended June 30, 2007 and 2006 are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007		2006
				(In thousands)
Net income (loss) attributable to common stockholders	$	(4,390	)	$	(1,244	)	$	203	$	(3,309	)
Foreign currency translation adjustment		17			(5	)		14		(25	)
Total comprehensive income (loss)	$	(4,373	)	$	(1,249	)	$	217	$	(3,334	)

9.   Restructuring

In April 2006, the Company announced and commenced implementation of a restructuring program. The restructuring included, among other things, streamlining our software development groups and reducing staff in some administrative functions to better align the cost structure with revenue and growth expectations. The restructuring charge incurred during 2006 was approximately $827,000 and consists of severance-related payments

13

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

for all employees terminated in connection with the restructuring. At December 31, 2006, substantially all of the severance payments had been made. At June 30, 2007, no restructuring reserve remained.

10.   Legal Matters

On September 10, 2003, CollegeNet, Inc. filed suit in Federal District Court in Oregon, alleging that the Company infringed a patent owned by CollegeNet, U.S. Patent No. 6,460,042 (“the ‘042 Patent”), related to the processing of the on-line applications. CollegeNet never served the Company and no discovery was ever conducted. However, apparently based on adverse rulings in the related lawsuits concerning the same ‘042 Patent (the “Related Litigation”), CollegeNet dismissed the 2003 case against the Company without prejudice on January 9, 2004.

On August 2, 2005, the Court of Appeals for the Federal Circuit issued an opinion favorable to CollegeNet in its appeal from the adverse rulings in the Related Litigation.

The next day, on August 3, 2005, CollegeNet again filed suit against the Company alleging infringement of the same ’042 Patent that was the subject of the earlier action. On November 21, 2005, CollegeNet filed an amended complaint, which added a second patent, U.S. Patent No. 6,910,045 (“the ‘045 Patent”), to the lawsuit. The Company was served with the amended complaint on November 22, 2005, and filed its answer and counterclaims on January 13, 2006, which was later amended on February 24, 2006. On March 20, 2006 CollegeNet filed its Reply to the Company’s counterclaims. CollegeNet seeks injunctive relief and unspecified monetary damages.

The Company filed a request with the United States Patent and Trademark Office (“PTO”) forex partereexamination of CollegeNet’s ‘042 Patent on September 1, 2005. The Company filed another request with the PTO forex parte reexamination of CollegeNet’s ‘045 Patent on December 12, 2005. Although CollegeNet has not pursued any claims against the Company on a related U.S. Patent No. 6,345, 278 (“the ‘278 Patent”), the Company filed another request with the PTO for ex parte reexamination claims 1-18,21-29,31-39, 41 and 42 of the ‘278 Patent on November 8, 2006. The PTO granted the Company’s requests and ordered reexamination of all claims of the CollegeNet ‘042 patent on October 31, 2005, ordered reexamination of all claims of the ‘045 Patent on January 27, 2006, and ordered reexamination of claims 1-18,21-29,31-39, 41 and 42 of the ‘278 Patent on February 2, 2007.

On March 29, 2006, the court granted the Company’s motion to stay all proceedings in the lawsuit pending completion of the PTO’s reexaminations of the CollegeNet ‘042 and ‘045 patents. On November 9, 2006 the PTO issued a Non-Final Office Action rejecting all 44 claims of the ‘042 patent.

The PTO has not yet taken any substantive action on the reexaminations of the ‘045 and ‘278 patents, other than instituting the proceedings.

On July 20, 2007 the PTO issued a “Notice of Intent to IssueEx Parte Reexamination Certificate” in the reexamination of the ‘042 patent. A reexamination certificate is expected to be issued for the ‘042 patent within the next several months. Based on the PTO’s July 20th notice, the certificate is expected to confirm the validity of claims 1-31 as originally issued, allow new claims45-53 and allow the other claim with certain amendments. The PTO’s July 20^th decision to allow claims 1-31 of the ‘042 patent as originally issued is in conflict with a jury verdict rendered on October 5, 2006 in the case of CollegeNet v. XAP Corporation (Civil ActionNo. 03-129-BR), which found that claims 16,18-22, 28, 32, 33, 36 and 38 of the ‘042 patent are invalid. However, as of July 27, 2007, a final judgment has not been entered in the CollegeNet v. XAP Corporation lawsuit.

11.   Disposal of Assets

Admissions Tech Business

On February 16, 2007, the Company completed its sale of certain assets of the Company’s Admissions Services Division. The Company sold to Embark Corp. the assets related to providing electronic application and prospect management tools to schools and higher education institution customers (the “Admissions Tech

14

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

Business”). The purchase price consisted of $7,000,000, subject to customary closing adjustments. Additionally, the Company is entitled to an earn-out of up to an additional $1.25 million based upon certain achievements of the Admissions Tech Business in 2007. The Company recorded a gain on the sale of these assets in the amount of $4.5 million.

The following table includes certain summary income statement information related to the Admissions Tech Business, reflected as discontinued operations for the periods presented:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007		2006
				(In thousands)
Revenues	$	(48	)	$	791		$	2,406	$	2,289
Cost of revenues		55			392			392		875
Gross margin		(103	)		399			2,014		1,414
Operating expenses(a)		143			827			1,062		1,720
Income (loss) from discontinued operations	$	(246	)	$	(428	)	$	952	$	(306	)

(a) Excludes corporate overhead expense previously allocated to the Admissions Tech Business in accordance with Emerging Issues Task Force IssueNo. 87-24, “Allocation of Interest Expense to Discontinued Operations.” The amount of corporate overhead expense added back to the Company’s continuing operations totaled $350,000 for the three months ended June 30, 2006 and $69,800, $730,800 for the six months ended June 30, 2007 and 2006, respectively.

The net assets of the discontinued operations were as follows as of December 31, 2006.

	December 31,
	2006
	(In thousands)
Current assets	$	181
Furniture, fixtures, equipment and software development, net		138
Goodwill		500
Other intangibles, net		1,283
Other assets		59
Non-current assets		1,980
Total assets related to discontinued operations	$	2,161
Current liabilities	$	2,541
Total liabilities related to discontinued operations	$	2,541

Services and License Agreement

The Company entered into a Services and License Agreement, dated as of April 27, 2007 (the “Agreement”), with Higher Edge Marketing Services, Inc. (the “Licensee”), a company controlled by Young Shin, a former executive officer and head of the Company’s Admissions Services division. Pursuant to the terms of the Agreement, the Licensee will provide ongoing collection and management services to the Company in connection with certain of the Company’s marketing agreements with post-secondary institutions. The term of the Agreement is seven years, and it provides for renewal at the end of the term under certain circumstances.

15

THE PRINCETON REVIEW, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

The Company will pay the Licensee certain collection and management fees for outstanding amounts collected by Licensee and for other services provided in managing the agreements. The Licensee will pay the Company a variable royalty from 30% to 50% on amounts collected by the Licensee under new marketing agreements entered into by the Licensee after the date of the Agreement. The Licensee’s payments to the Company are subject to increasing annual minimum amounts. In addition, the Licensee will pay the Company a 5% royalty on all amounts received by the Licensee generated from the sale of any other goods or services to any post-secondary educational institution.

The Company agreed to lend money to the Licensee for use as working capital for the business in a maximum amount equal to 50% of certain amounts collected by the Licensee under the Agreement. Outstanding amounts will accrue interest monthly at prime (as quoted by the Company’s lenders) and must be repaid no later than the first anniversary of the Agreement. The Company also agreed to provide the Licensee with a line of credit for initial working capital needs. Funds drawn on the line of credit will accrue interest at an annual rate of 18% and must be repaid no later than 18 months from the date of the Agreement. The aggregate financing obligation of the Company under the Agreement is capped at $300,000.

12.   Subsequent Events

On July 23, 2007, The Princeton Review, Inc. (the “Company”) entered into a Series C Preferred Stock Purchase Agreement (the “Purchase Agreement”) with Bain Capital Venture Fund 2007, L.P., and its affiliates, Prides Capital Fund I LP (“Prides”) and RGIP, LLC (collectively, the “Purchasers”), providing for the issuance and sale of $60,000,000 of the Company’s Series C Convertible Preferred Stock (60,000 shares) at a purchase price of $1,000 per share (the “Series C Preferred Stock”). Each share of Series C Preferred Stock shall be convertible into shares of the Company’s common stock at an initial conversion price of $6.00 per share, subject to adjustment. The Series C Preferred Stock contains a compounding, cumulative 6% per annum dividend payable upon conversion of the Series C Preferred Stock. Following the fourth anniversary of the issuance of the Series C Preferred Stock the dividend shall no longer accrue unless declared by the Board of Directors of the Company (the “Board”).

The Purchase Agreement allows the holders of the Series C Preferred Stock to elect two directors to the Board who were elected on July 23, 2007. The Purchase Agreement also grants observer rights to Prides with respect to meetings of the Board.

In addition, the Company entered into an Investor Rights Agreement dated July 23, 2007, by and among the Company and the Purchasers, pursuant to which the Company granted the Purchasers and Mr. Michael J. Perik demand registration rights for the registration of the resale of the shares of common stock issued or issuable upon conversion of Series C Preferred Stock. Any demand for registration must be made for at least 20% of the total shares of such common stock then outstanding, provided, however, that the aggregate offering price shall not be less than $2,500,000. The Investor Rights Agreement also grants the Purchasers preemptive rights with respect to certain issuances which may be undertaken by the Company in the future.

On July 23, 2007, Prides Capital Fund I, L.P. and the Company agreed to terminate an Agreement (the “Fletcher Agreement”), dated May 28, 2004, by and among the Company and Prides, as the assignee of Fletcher International, Ltd. (“Fletcher”) pertaining to the Company’s outstandingSeries B-1 Preferred Stock, and all related rights, effective as of the closing date of the Purchase Agreement. Prides had acquired theSeries B-1 Preferred Stock and the rights under the Fletcher Agreement from an unaffiliated third party on June 8, 2007. The Fletcher Agreement was terminated and theSeries B-1 Preferred Stock and all its related rights were cancelled and retired when theSeries B-1 Preferred Stock was exchanged as partial consideration for the purchase by Prides of the Series C Preferred Stock.

On July 24, 2007, the Company paid down the $15 million of debt outstanding and any accumulated interest with Golub Capital and terminated the credit facility. The result of all these transactions increased the Company’s cash position by approximately $30 million.

16

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

All statements in thisForm 10-Q that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by words such as “believe,” “intend,” “expect,” “may,” “could,” “would,” “will,” “should,” “plan,” “project,” “contemplate,” “anticipate” or similar statements. Because these statements reflect our current views concerning future events, these forward-looking statements are subject to risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to demand for our products and services; our ability to compete effectively and adjust to rapidly changing market dynamics; the timing of revenue recognition from significant contracts with schools and school districts; market acceptance of our newer products and services; continued federal and state focus on assessment and remediation in K-12 education; and the other factors described under the caption “Risk Factors” in our Annual Report onForm 10-K for the year ended December 31, 2006, as such factors may be amended in subsequently filed Quarterly Reports onForm 10-Q, filed with the SEC. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Overview

The Princeton Review provides educational products and services to students, parents, educators and educational institutions. These products and services include integrated classroom-based and online instruction, professional development for teachers and educators, print and online materials and lessons, and higher education marketing services. We operate our businesses through two divisions, which correspond to our business segments.

Test Preparations Services Division

The Test Preparation Services division derives the majority of its revenue from classroom-based and Princeton Review online test preparation courses and tutoring services. Additionally, Test Preparation Services receives royalties from its independent franchisees, which provide classroom-based courses under the Princeton Review brand. Since 2004, this division has also been providing Supplemental Educational Services (“SES”) programs to students in public school districts. This division has historically accounted for the majority of our overall revenue and was approximately 71% of our overall revenue in the first half of 2007.

Until February 2007, the Admissions Services division derived most of its revenue from the sale of web-based admissions and related application management products to educational institutions (“Higher Education Technology Services”). In February 2007, we sold our web-based admissions and application management business for $7.0 million in cash and a potential earn-out of up to $1.25 million. In connection with this transaction, the other businesses operated by this division (college counseling and admissions publications) were transferred to the K-12 Services and Test Preparation Services divisions, respectively. The only remaining business operated by our Admissions Services division is providing higher education marketing services to post secondary schools. In April 2007, the Company outsourced the business of selling these marketing services to post secondary schools to Higher Edge Marketing, Inc., as more fully described in Note 9 to our condensed consolidated financial statements. Under this new arrangement, the sales and customer support functions related to this business will be performed by Higher Edge Marketing and we will be responsible solely for the fulfillment function. Accordingly, all of the remaining employees in this division were transferred to other divisions, or terminated and re-hired by Higher Edge Marketing, Inc. As a result, Higher Edge Marketing will contract with post secondary schools directly and will pay us a royalty on the fees it receives from post secondary schools for marketing services. In connection with the sale of the Higher Education Technology Services business, financial results associated with this business have been reclassified as discontinued operations. Additionally, financial results associated with admissions publications and marketing services, including any royalties from Higher Edge Marketing Services, Inc, previously reported in the Admissions Services division, have been reclassified for all periods presented into Test Preparation Services. Lastly college counseling services previously reported in the Admissions Services division have been reclassified for all periods and are presented with K-12 Services.

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K12 Services Division

The K-12 Services division provides a number of services to K-12 schools and school districts, including assessment, professional development, intervention materials (workbooks and related products) and college counseling services. As a result of the increased emphasis on accountability and the measurement of student performance in public schools, this division continues to see growing demand by the public school market for its products and services as evidenced by the number of new contracts and the continued growth in sales prospects.

Results of Operations

Comparison of Three Months Ended June 30, 2007 and 2006

Revenue

For the three months ended June 30, 2007, total revenue increased by $3.2 million, or 9.5%, from $33.2 million in 2006 to $36.4 million in 2007.

Test Preparation Services revenue increased by $5.0 million, or 22.1%, from $22.5 million in 2006 to $27.5 million in 2007. This increase is due primarily to an increase of $1.9 million in tutoring revenue and an increase of $1.2 million in institutional revenue as a result of increased SES enrollments. Additionally, licensing and royalty revenue increased by $1.8 million as a result of increased royalty payments from our publisher and from our franchisees.

K-12 Services revenue decreased by $1.8 million, or 17.2%, from $10.7 million in 2006 to $8.9 million in 2007. Revenue from intervention products and services decreased by $3.3 million due to the non-renewal in 2007 of the summer intervention program for the School District of Philadelphia. Additionally, counseling revenues decreased by $633,000 resulting from the non-renewal of a large contract in Texas. These decreases were partially offset by Assessment services revenue which increased by $2.5 million reflecting the billings for contracts added in the second half of 2006 and the first quarter 2007.

Cost of Revenue

For the three months ended June 30, 2007, total cost of revenue increased by $1.1 million or 7.9%, from $13.4 million in 2006 to $14.4 million in 2007.

Test Preparation Services cost of revenue increased by $907,000, or 11.3%, from $8.0 million in 2006 to $8.9 million in 2007. Teacher pay increased approximately $886,000 primarily due to volume increases for SES and Tutoring teachers and increased course materials of approximately $193,000. Gross margins improved from 64.4% to 67.6% primarily as a result of the increase in the higher margin tutoring and licensing and royalty revenue.

K-12 Services cost of revenue increased by $146,000, or 2.7%, from $5.4 million in 2006 to $5.5 million in 2007. Increases in costs of $2.1 million associated with the assessment revenue were partially offset by decreases in the costs associated with the intervention and counseling contracts that were not renewed in 2007. Gross margins decreased from 49.8% to 37.7% as a result of product mix and certain assessment contracts that incurred a higher level of costs.

Operating Expenses

For the three months ended June 30, 2007, operating expenses increased by $1.5 million, or 7.5%, from $20.2 million in 2006 to $21.5 million in 2007:

•  Test Preparation Services operating expenses increased by $1.4 million, or 12.1%, from $11.8 million in 2006 to $13.2 million in 2007. Software development and maintenance expenses increased by $880,000 as a result of new projects and legal fees increased $343,000 primarily due to our litigation with the former Tennessee franchisee

•  K-12 Services decreased by $856,000, or 18.3%, from $4.7 million in 2006 to $3.8 million in 2007. Salaries and related expense decreased $1.1 million primarily as a result of headcount reductions, lower commissions and bonuses and increased operational efficiencies whereby a larger percentage of salaries are charged to

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contract costs which flow through cost of revenue. These savings were partially offset by increased software development and maintenance expenses.

•  Corporate increased by $949,000 or 25.5%, from $3.7 million in 2006 to $4.7 million in 2007 primarily due to increased salaries and related expenses of $938,000 and professional fees of 770,000, offset by savings in miscellaneous other general and administrative expenses.

Other income (expense)

Other income (expense) includes an expense of $3.7 million resulting from the increase in the fair value of the embedded derivative liability related to theSeries B-1 Preferred Stock. (see note 4).

Comparison of Six Months Ended June 30, 2007 and 2006

Revenue

For the six months ended June 30, 2007, total revenue increased by $9.7 million, or 14.5%, from $66.8 million in 2006 to $76.6 million in 2007.

Test Preparation Services revenue increased by $6.2 million, or 12.8%, from $48.4 million in 2006 to $54.6 million in 2007. This increase is primarily related to volume increases in institutional revenues of $3.8 million including SES, and tutoring revenues of $2.6 million and an increase in licensing and royalty revenue of $1.4 million. These increases were partially offset by a decrease in retail classroom revenues of $2.1 million.

K-12 Services revenue increased by $3.5 million, or 19.1%, from $18.4 million in 2006 to $21.9 million in 2007 primarily related to the increase in assessment revenue of $7.6 million from several new and renewal contracts. This increase was partially offset by lower intervention revenues ($2.6 million) and lower counseling revenues ($1.2 million) resulting primarily from contracts that were not renewed.

Cost of Revenue

For the six months ended June 30, 2007, total cost of revenue increased by $5.8 million, or 21.7%, from $26.8 million in 2006 to $32.6 million in 2007.

Test Preparation Services cost of revenue increased by $3.9 million, or 24.3%, from $16.2 million in 2006 to $20.1 million in 2007. Teacher pay increased by $2.4 million primarily due to volume increases in SES and tutoring. Site rent increased by approximately $1.1 million due to increase in classroom space rentals as well as increased rental fees charged for SES classes by schools.

K-12 Services cost of revenue increased by $1.9 million, or approximately 17.8%, from $10.6 million in 2006 to $12.4 million in 2007. Expenses to service assessment contracts increased by $4.4 million and were partially offset by decreases in intervention cost ($1.7 million) and counseling costs ($600,000). margin labor services.

Operating Expenses

For the six months ended June 30, 2007, operating expenses increased by $1.7 million, or 4.0%, from $42.4 million in 2006 to $44.1 million in 2007:

•  Test Preparation Services remained the same at approximately $25.6 million in both periods.. Professional services fees increased by $509,000 primarily due to legal expenses related to franchise matters. These increases were offset by decreases associated with the saleand/or downsizing of the Admissions Services businesses during the first half of the 2007.

•  K-12 Services decreased by $606,000, or 6.9%, from $8.8 million in 2006 to $8.2 million in 2007. Salaries and related costs decreased by approximately $1.7 million primarily as a result of headcount reductions, lower commissions/bonuses and increased operational efficiencies whereby a larger percentage of salaries are charged to contract costs which flow through cost of revenue. These savings were partially offset by increased software development and maintenance expenses ($534,000) and increased amortization expense ($212,000).

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•  Corporate increased by $2.6 million or 32.4%, from $8.0 million in 2006 to $10.6 million in 2007. Professional service fees including legal, accounting and web hosting expenses increased by approximately $1.3 million, salaries and related expenses increased by $554,000 and depreciations and amortization expense increased by $258,000 primarily due to the Oracle software implements in the second quarter of 2006.

Other income (expense)

Other income (expense) includes an expense of $3.7 million resulting from the increase in the fair value of the embedded derivative liability related to theSeries B-1 Preferred Stock. (See note 4).

Income Taxes

The estimated effective tax rate used in 2007 and 2006 would have been approximately 40%. During the current quarter, pursuant to FAS 109, the Company has recorded an income tax benefit related to continuing operations for the three and six months ended June 30, 2007 in the amount of $394,000 and $572,000, which is offset by a foreign tax provision of $94,000. For the three months ended March 31, 2007, we recorded an income tax benefit of $178,000. A corresponding provision for income taxes for the three and six months ended June 30, 2007 of $394,000 and $572,000 has been recorded as part of the Company’s Income from Discontinued Operations.

Liquidity and Capital Resources

Our primary sources of liquidity are cash and cash equivalents on hand, collections from customers and our credit facility. At June 30, 2007, we had $11.2 million of cash and cash equivalents compared to $10.8 million at December 31, 2006. The $357,000 increase in cash from the December 31, 2006 balance is primarily attributed to cash provided from the net proceeds of the sale of the Higher Education Technology Services business in February 2007 operations, which resulted in net proceeds of $5.0 million. This was offset by $3.3 million used for operating activities, $1.1 million used for the purchase of furniture, fixtures, equipment and software development, and $599,000 related to capital lease payments and dividends paid on theSeries B-1 Preferred Stock.

Our Test Preparation Services division has historically generated, and continues to generate, the largest portion of our cash flow from its retail classroom and tutoring courses. These customers usually pay us in advance or contemporaneously with the services we provide, thereby supporting our short-term liquidity needs. Increasingly, however, across all of our divisions, we are generating a greater percentage of our cash from contracts with institutions such as schools and school districts and post-secondary institutions, all of which pay us in arrears. Typical payment performance for these institutional customers, once invoiced, ranges from 60 to 90 days. Additionally, the long contract approval cyclesand/or delays in purchase order generation with some of our contracts with large institutions or school districts can contribute to the level of variability in the timing of our cash receipts.

Cash provided by (used in) operating activities from continuing operations is our net income (loss) adjusted for certain non-cash items and changes in operating assets and liabilities. During the first six months of 2007, cash used for operating activities from continuing operations was $3.3 million, compared to cash used in operating activities from continuing operations of $2.9 million during the first three months of 2006.

During the first six months of 2007, investing activities from continuing operations used $910,000 of cash as compared to $2.2 million used during the comparable period in 2006. The decrease is primarily attributable to lower spending for both internally developed software and capitalized K-12 content and capitalized course costs.

Financing cash flows from continuing operations consist primarily of transactions related to our debt and equity structure. During the first six months of 2007, financing activities from continuing operations used $632,000 of cash as compared to additions of approximately $4.4 million in the first six months of 2006. During the 2006 quarter, we borrowed $10 million under a new credit facility. Of this amount, $4.4 million was used to redeem 4,000 shares ofSeries B-1 Preferred Stock. The remaining amount borrowed under the credit facility was used for working capital purposes. In addition, there were financing expenditures of approximately $599,000 and $708,000

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for the first six months of 2007 and 2006, respectively, principally related to capital lease payments and dividends paid on ourSeries B-1 Preferred Stock.

In July, 2007, we entered into a Series C Preferred Stock Purchase agreement providing for the issuance of $60.0 million of Series C Preferred Stock. We agreed with the current holder to terminate the “Fletcher Agreement” pertaining to ourSeries B-1 Preferred Stock, and all related rights. We also paid down the $15.0 million of debt outstanding and terminated the credit facility. The result of all these transactions increased our cash position by approximately $30.0 million.

Our future liquidity needs will depend on, among other factors, the timing and extent of technology development expenditures, new business bookings, the timing and collection of receivables and continuing initiatives designed to improve operating cash flow. We believe that our current cash balances, together with the proceeds from the sale of the Series C Preferred stock, and anticipated operating cash flow will be sufficient to fund our normal operating requirements for the next 12 months. However, in the event of unanticipated cash needs, we may need to secure additional capital within this timeframe.

Seasonality in Results of Operations

We experience, and we expect to continue to experience, seasonal fluctuations in our revenue because the markets in which we operate are subject to seasonal fluctuations based on the scheduled dates for standardized admissions tests and the typical school year. These fluctuations could result in volatility or adversely affect our stock price. We typically generate the largest portion of our test preparation revenue in the third quarter. However, as SES revenue grows, we expect this revenue will be concentrated in the fourth and first quarters, or to more closely reflect the after school programs’ greatest activity during the school year. Our K-12 Services division may also experience seasonal fluctuations in revenue, which is dependent on the school year, and it is expected that the revenue from new school sales during the year will be recognized primarily in the fourth quarter and the first quarter of the following year.

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

Our portfolio of marketable securities includes primarily short-term money market funds. The fair value of our portfolio of marketable securities would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due primarily to the short-term nature of the portfolio. OurSeries B-1 Preferred Stock requires the payment of quarterly dividends at the greater of 5% or 1.5% above90-day LIBOR (5.36% at June 30, 2007). During the six months ended June 30, 2007, we paid dividends on theSeries B-1 Preferred Stock in an aggregate amount of $207,000, at an average rate of 6.90%. A 100 basis point increase in the dividend rate would have resulted in a $30,000 increase in dividends paid during this period.

Borrowings under our credit agreement bear interest at the following rates: Outstanding amounts under the credit facility up to $10.0 million bear interest at rates based on either (A) 300 basis points over the greater of (x) the prime rate and (y) the Federal Funds Rate plus 50 basis points or (B) 400 basis points over LIBOR, at our election. Outstanding amounts under the credit facility in excess of $10.0 million (or the borrowing base amount, if lower) bear interest at either (A) 400 basis points over the greater of (x) the prime rate and (y) the Federal Funds Rate plus 50 basis points or (B) 500 basis points over the LIBOR rate, at our election. During the six months ended June 30, 2007, we paid interest on borrowings under our credit agreement in an aggregate amount of $546,000 at a weighted average interest rate of 7.28%. A 100 basis point increase in the interest rate would have resulted in a $75,000 increase in interest paid during this period.

As more fully described in Note 4 to our condensed consolidated financial statements, we must account for the embedded derivatives and warrant related to ourSeries B-1 Preferred Stock. Other than these embedded derivatives, we do not hold any derivative financial instruments. See Note 12 to the Condensed Consolidated Financial Statements — Subsequent Events which describe the termination of the Series B-1 Preferred Stock and the repayment of all borrowings under the credit agreement in July, 2007.

Revenue from our international operations and royalty payments from our international franchisees constitute an insignificant percentage of our revenue. Accordingly, our exposure to exchange rate fluctuations is minimal.

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Item 4.   Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures,” as defined inRule 13a-15(e) orRule 15d-15(e) under the Exchange Act, (“Disclosure Controls”) as of the end of the period covered by this Quarterly Report. The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”).

Scope of the Controls Evaluation

The evaluation of our Disclosure Controls included a review of the controls’ objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in this Quarterly Report. In the course of the controls evaluation, we sought to identify data errors, control problems or acts of fraud and confirm that appropriate corrective actions, including process improvements, were being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the controls can be reported in our Quarterly Reports onForm 10-Q and in our Annual Reports onForm 10-K. Many of the components of our Disclosure Controls are also evaluated on an ongoing basis by other personnel in our accounting, finance and legal functions. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and to modify them on an ongoing basis as necessary. A control system can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

Conclusions

As described in detail in Item 9A of the company’s 2006Form 10-K,(“Form 10-K”) the company’s management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2006. Management’s assessment identified four material weaknesses in internal control over financial reporting as of that date. These material weaknesses were identified in the areas of financial statement close process, estimating the collectability of accounts receivable, revenue recognition and the accounting for embedded derivatives contained within theSeries B-1 Preferred Stock and the related warrant. In light of these material weaknesses identified by management, which have not been remediated as of the end of the period covered by this Quarterly Report, our CEO and CFO concluded, after the evaluation described above, that our Disclosure Controls were not effective, as of the end of the period covered by this Quarterly Report, in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the period covered by thisForm 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except for the activities described below. We have implemented certain remediation measures and are in the process of designing and implementing additional remediation measures for the material weaknesses described in theForm 10-K. Such remediation activities include the following:

•  We have hired and continue to seek more qualified and experienced accounting personnel to perform the month end review and closing processes as well as provide additional oversight and supervision within the accounting department.

•  We have established more rigorous review procedures to ensure that account reconciliations and amounts recorded are substantiated by detailed and contemporaneous documentary support and that reconciling items are investigated, resolved and recorded in a timely manner.

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•  We are continuing to formalize a contract review process to establish and document the revenue recognition events and methodology at the time the contract is signed which will be reviewed and signed off by both the finance personnel and the project managers so that there is a clear understanding of what events will trigger revenue recognition and establish the amounts to be recognized for each event.

•  We are initiating programs providing ongoing training and professional education and development plans for the accounting department and improving internal communications procedures throughout the company.

In addition to the foregoing remediation efforts, we will retain a consulting firm to assist with the documentation of our internal control processes, including formal risk assessment of our financial reporting processes.

PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

On September 10, 2003, CollegeNet, Inc. filed suit in Federal District Court in Oregon, alleging that the Company infringed a patent owned by CollegeNet, U.S. Patent No. 6,460,042 (“the ‘042 Patent”), related to the processing of the on-line applications. CollegeNet never served the Company and no discovery was ever conducted. However, apparently based on adverse rulings in the related lawsuits concerning the same ‘042 Patent (the “Related Litigation”), CollegeNet dismissed the 2003 case against the Company without prejudice on January 9, 2004.

On August 2, 2005, the Court of Appeals for the Federal Circuit issued an opinion favorable to CollegeNet in its appeal from the adverse rulings in the Related Litigation.

The next day, on August 3, 2005, CollegeNet again filed suit against the Company alleging infringement of the same ’042 Patent that was the subject of the earlier action. On November 21, 2005, CollegeNet filed an amended complaint, which added a second patent, U.S. Patent No. 6,910,045 (“the ‘045 Patent”), to the lawsuit. The Company was served with the amended complaint on November 22, 2005, and filed its answer and counterclaims on January 13, 2006, which was later amended on February 24, 2006. On March 20, 2006 CollegeNet filed its Reply to the Company’s counterclaims. CollegeNet seeks injunctive relief and unspecified monetary damages.

The Company filed a request with the United States Patent and Trademark Office (“PTO”) forex partereexamination of CollegeNet’s ‘042 Patent on September 1, 2005. The Company filed another request with the PTO forex parte reexamination of CollegeNet’s ‘045 Patent on December 12, 2005. Although CollegeNet has not pursued any claims against the Company on a related U.S. Patent No. 6,345, 278 (“the ‘278 Patent”), the Company filed another request with the PTO for ex parte reexamination claims 1-18,21-29,31-39, 41 and 42 of the ‘278 Patent on November 8, 2006. The PTO granted the Company’s requests and ordered reexamination of all claims of the CollegeNet ‘042 patent on October 31, 2005, ordered reexamination of all claims of the ‘045 Patent on January 27, 2006, and ordered reexamination of claims 1-18,21-29,31-39, 41 and 42 of the ‘278 Patent on February 2, 2007.

On March 29, 2006, the court granted the Company’s motion to stay all proceedings in the lawsuit pending completion of the PTO’s reexaminations of the CollegeNet ‘042 and ‘045 patents. On November 9, 2006 the PTO issued a Non-Final Office Action rejecting all 44 claims of the ‘042 patent.

The PTO has not yet taken any substantive action on the reexaminations of the ‘045 and ‘278 patents, other than instituting the proceedings.

On July 20, 2007 the PTO issued a “Notice of Intent to IssueEx Parte Reexamination Certificate” in the reexamination of the ‘042 patent. A reexamination certificate is expected to be issued for the ‘042 patent within the next several months. Based on the PTO’s July 20th notice, the certificate is expected to confirm the validity of claims 1-31 as originally issued, allow new claims45-53 and allow the other claim with certain amendments. The PTO’s July 20^th decision to allow claims 1-31 of the ‘042 patent as originally issued is in conflict with a jury verdict rendered on October 5, 2006 in the case of CollegeNet v. XAP Corporation (Civil ActionNo. 03-129-BR), which found that claims 16,18-22, 28, 32, 33, 36 and 38 of the ‘042 patent are invalid. However, as of July 27, 2007, a final judgment has not been entered in the CollegeNet v. XAP Corporation lawsuit.

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The Princeton Review believes that it has meritorious defenses to CollegeNET’s claims and intends to vigorously defend.

Item 1A.   Risk Factors

There have been no material changes in the risk factors disclosed in our Annual Report onForm 10-K for the year ended December 31, 2006.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3.   Defaults Upon Senior Securities

Not applicable.

Item 4.   Submission of Matters to a Vote of Security Holders

(a) We held our Annual Meeting of Stockholders on June 14, 2007.

(b) Proxies for the meeting were solicited pursuant to Regulation 14 under the Exchange Act; there was no solicitation in opposition to the Board Nominating Committee’s nominees listed in the Proxy Statement, and all such nominees were elected.

Directors elected to the 2010 Class were Richard Sarnoff and Clyde E. Williams, Jr.*

Election of Directors:

	For		Withheld
Richard Sarnoff		22,664,631		3,771,105
Clyde E. Williams, Jr.		24,284,211		2,151,525

Other directors whose terms continue after the meeting were Richard Sarnoff, John S. Katzman, Robert E. Evanson, Richard Katzman, David Lowenstein and Richard F. O’ Donnell.

*Mr. Howard Tullman, who served as a director of the Company since 2000 and as Chairman of the Board since November of last year, resigned from the Board to pursue other opportunities, and therefore did not stand for re-election at this meeting. Following Mr. Tullman’s resignation from the Board, the Board’s nominating committee nominated Mr. Clyde E. Williams, Jr. to fill the vacancy on the Board created by Mr. Tullman’s departure. The Board then unanimously elected Mr. Williams to fill such vacancy on June 8. Therefore, Mr. Williams was nominated by the Board to stand for election in place of Mr. Tullman.

Item 5.   Other Information

Effective August 9, 2007, Richard O’Donnell resigned as a member of the Company’s Board of Directors.

On August 8, 2007, Stephen Melvin, the Company’s Chief Financial Officer, notified the Company of his intent to resign as Chief Financial Officer prior to the end of 2007.

Item 6.   Exhibits

Exhibit
Number			Description
	10	.1	Michael Perik Employment Agreement
	10	.2	Mark Chernis Employment Agreement, Amendment
	10	.3	Michael Perik Option Agreement
	31	.1	Certification Pursuant toRule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.2	Certification Pursuant toRule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

THE PRINCETON REVIEW, INC.

By:  /s/  STEPHEN MELVIN

Stephen Melvin

Chief Financial Officer and Treasurer

(Duly Authorized Officer and Principal

Financial and Accounting Officer)

August 9, 2007

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